Most of the time when someone mentions a property tax deduction, they're thinking about homeowners' taxes on a primary residence. However, that's not the end of the story.
State and local governments impose taxes on different types of properties. The IRS allows you to deduct many of these on your tax return, but there are new rules and restrictions on the maximum amount.
Let's take a look at the taxes that you might be missing and could be deductible for you.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 changed the regulations regarding property tax deductions. Most notably, the TCJA put a cap on the deductions for state and local taxes.
Beginning in 2018, the total amount that you can deduct for state and local taxes, including property taxes, became $10,000 ($5,000 if married filing separately). In previous years, there was no limit on the amount that you could deduct for real estate property taxes. If you paid $5,000 in property taxes, you got to deduct $5,000; If you paid $30,000 in property taxes, you deducted $30,000. No longer.
This new regulation limiting the amount of tax that could be deducted hit taxpayers especially hard in states with high property taxes. Homeowners in these high property tax states often had taxes well in excess of $10,000 and that deductibility is now lost.
Under the TCJA, you can deduct your property taxes plus your state income taxes and state sales tax on Schedule A. The $10,000 cap applies to the total amount, not just property taxes alone.
However, you're not allowed to deduct both your state income taxes and sales tax. You must choose one or the other.
Deductible Property Taxes
To qualify as a personal deduction, real estate taxes must be:
- Used for community or government purposes
- Uniformly levied across the community
- Based on the property’s value, known as ad valorem taxes
- Assessed by the end of each tax year
If the property meets these qualifications, the IRS allows you to deduct the taxes on the following types of properties:
- Primary home
- Second homes
- Co-op apartments
- Cars, RVs and other vehicles
- Taxes on repair and maintenance of sidewalks, streets or water and sewage systems
Non-Deductible Property Taxes
The following taxes are not deductible:
- Unpaid property taxes
- Assessments for water and sewer systems, sidewalks or streets
- Portion of property tax designated for services
- Transfer taxes on sale of house
- Assessments from homeowners association. However, if the invoice from the HOA details the payment of any property taxes, these would be deductible.
- Taxes on rental or commercial property not deductible on personal returns
How to Claim Property Tax Deductions
Itemizing your personal tax deductions on income tax Form 1040 with Schedule A only makes sense if the total of your deductions exceeds the standard deduction, which for tax year 2020 is $12,400 for a single taxpayer or $24,800 if married filing jointly.
Taxpayers in states with high real estate property taxes – such as New York, New Jersey and California – will easily reach the $10,000 TCJA cap and will also likely have high mortgage interest deductions. The itemized deductions for these taxpayers will probably exceed the standard deduction.
On the other hand, taxpayers in states with low real estate property taxes, such as Alabama where the average property tax is $854 or Colorado with $1,076, will probably do better taking the standard deduction. For comparison, homeowners in New Jersey pay an average of $5,064 in property taxes.
To claim a property tax deduction, you must itemize your deductions and use Schedule A. You cannot use the standard deduction and claim a property tax deduction. You have to do the calculations for both methods to find which one gives you the most deductions.
Read More: How Far in Advance Can You Pay Property Taxes?
How to Pay Real Estate Property Taxes
People usually pay their taxes in one of two ways: they pay by check once or twice a year after receiving a bill, or money is set aside each month in an escrow account with the mortgage payment and the lender pays the taxes out of the escrow account to the local government.
If paying by check, property taxes are deductible in the year they are paid. Payments made from mortgage escrow accounts are deductible in the year they are paid, not when they are added to your escrow account.
Your mortgage lender should send you a Form 1098 by Jan. 31 with information about payment of mortgage interest and property taxes.
Taxes on a Second Home
If you personally use a second home for more than 14 days a year or more than 10 percent of the number of days the property is rented, you can deduct the mortgage interest and real estate taxes on your Schedule A, just as you would with your primary residence.
These qualifications would apply even if you allowed members of your family – such as siblings, parents and grandparents – to use your second home and did not charge them rent.
Personal Property Taxes
The IRS allows you to deduct taxes on certain personal property, such as cars and boats. In order to qualify, these taxes must be:
- Levied on personal property
- Based on the value of the property
- Imposed annually
Note that some states base their vehicle registration fees to some extent on the value of the property. If so, the portion of the fees based on the property’s value can be deducted as a personal property tax expense on Schedule A.
In addition to taxes on personal properties, you may be paying property taxes that are deductible on commercial ventures.
If you have rental properties, you can deduct the property taxes on Schedule E - Supplemental Income and Loss. Even though you don't deduct these taxes on your personal returns, they are still deductible on business-related returns.
Property Taxes on Business Property
If you paid property tax on equipment used in your trade or business, these can be deducted as a business expense. Sole proprietors would deduct these taxes on Schedule C - Profit or Loss From Business and file with Form 1040.
If the property is used for both business and personal use, only the percentage of business use could be deducted as a business expense.
Generally, if you own a primary residence and are paying on a mortgage, you will be able to use Schedule A to deduct the mortgage interest and property taxes on your tax return. In addition, it pays to look around and see if you have other deductions that you can take for cars and other vehicles and even a second home, if you have one.
- Intuit TurboTax: Claiming Property Taxes on Your Tax Return
- Ramsey: How to Claim the Property Tax Deduction
- Investopedia: Property Tax Deduction
- H&R Block: Deducting Property Taxes
- Internal Revenue Service: Schedule A
- Internal Revenue Service: Schedule E
- Internal Revenue Service: Renting Residential and Vacation Property
- Intuit TurboTax: Buying a Second Home—Tax Tips for Homeowners
- WalletHub: Property Taxes by State
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.